How the Hedge Fund Manager Running Sears Cut His Losses

The hedge fund manager Edward S. Lampert has spent the last 14 years steering Sears as it spun off businesses, took on debt and, this week, filed for bankruptcy protection.

It has been a long, and often painful, trip, but how has Mr. Lampert fared?

His hedge fund, ESL Investments, appears to have racked up a much more modest loss than the company’s Chapter 11 bankruptcy filing would suggest, according to corporate filings and interviews with analysts and investors.

ESL’s nearly 50 percent stake in Sears will probably be wiped out in bankruptcy. But that loss is offset by gains elsewhere. For example, Mr. Lampert has collected hundreds of millions of dollars in interest and fees from Sears. He also took stakes in businesses that were spun off from the company, and some of those investments are doing well.

He and his hedge fund played an unusual role at Sears. In addition to being the company’s controlling shareholder, ESL was one of its biggest lenders. Mr. Lampert is the retailer’s chairman and, until Monday, he was also its chief executive.

For years, the company warned investors in regulatory filings that his interests “may be different than your interests” — a disclaimer that few publicly traded companies make.

But Mr. Lampert said he had always acted in the best interests of Sears. During a speech on Tuesday at the company’s headquarters in Hoffman Estates, Ill., he told employees that he could have cashed out years ago. Instead, he said, he “doubled down.”

“I did everything I could think of to try to make this company great again,’’ Mr. Lampert said, according to an audio recording of his remarks obtained by The New York Times.

Here’s how he made out on the various parts of Sears.

Loss

His investment in Sears stock is effectively worthless

In 2005, Mr. Lampert orchestrated one of the biggest retail mergers in history by using the discount retailer Kmart to buy the department-store giant Sears & Company.

A few years earlier, he had started buying up Kmart’s debt after the company filed for bankruptcy protection. His investment totaled $700 million, he told Fortune magazine in 2006. When Kmart came out of bankruptcy in 2003, ESL was its largest shareholder and Mr. Lampert its chairman.

The merger created the nation’s third-largest retailer. The deal was meant to help Sears and Kmart better compete against Walmart, which had overtaken both companies in the 1990s on its way to becoming the world’s largest retailer.

The deal was a wild success — at least in the early years. The stock of the combined company, Sears Holdings, soared, and ESL’s investment was worth $5 billion by 2007. The company was flush with cash and spent $6 billion buying back its own stock from 2005 through 2012. The hedge fund did not sell any of its shares.

Critics, including former Sears executives and employees, said the money would have been better spent improving Sears and Kmart stores and developing a better digital strategy. Mr. Lampert has said that he put money into stores and the online business, but that the investments did not pay off.

The good times did not last long. Sales started sliding in 2007, and the company’s steady profits turned into big losses a few years later. Sears needed money, and it increasingly turned to the Bank of Lampert for cash.

ESL and its affiliates lent Sears nearly $2.6 billion, about half its total debt as of September. The hedge fund could lose money on those loans. But because much of the retailer’s debt is secured by real estate and intellectual property ESL could recoup at least some of that investment.

The hedge fund has also collected about $400 million in interest and fees on that debt, helping to reduce Mr. Lampert’s losses on the company’s stock to about $300 million.

Win

Lands’ End, now an independent company, lives on

Sears acquired Lands’ End in 2002, hoping to bolster its struggling apparel business. But the preppy clothing never quite fit in at a company that made much of its money selling home appliances, tools and other household necessities.

Lands’ End lost ground to the likes of L.L. Bean in part because its clothing was mostly sold in worn-out Sears stores and on an outdated website. In 2014, Sears spun the business off into a separate publicly traded company. ESL got 15.4 million shares, or nearly half, of the new company, at no additional cost.

ESL and its affiliates bought six million more shares of Lands’ Ends as the stock price climbed. Their stake is now worth about $207 million.

Loss

Sears Canada and other businesses have not done as well

To raise cash, Sears spun off a number of other divisions. In almost every transaction, ESL bought shares in the new companies, becoming a significant or even the majority owner. For the most part, these corporate offspring have struggled or failed.

In late 2011, Sears gave shares in Orchard Supply Hardware to its shareholders, including ESL. But unable to compete against Home Depot and Lowe’s and saddled with debt, Orchard filed for bankruptcy protection a year later and was eventually acquired by Lowe’s.

In 2012, ESL and Mr. Lampert invested about $216 million in a public offering of Sears Hometown and Outlet Stores, which sells appliances and lawn and garden equipment. After hitting a high of nearly $56 a share in 2013, Sears Hometown’s stock has slumped. Today, it trades at just $2.55, putting ESL’s stake at $37.8 million.

In the case of Sears Canada, Mr. Lampert came close to making a profit. When the company was partially spun off from Sears Holdings in 2012, ESL got a 28 percent stake at no additional cost. The hedge fund collected $168 million in special dividends that Sears Canada paid out that year and in 2013.

In 2014, ESL spent $212 million to buy more Sears Canada shares. But the company filed for bankruptcy last year and subsequently closed all its stores. Taking the dividends into account, ESL lost about $44 million.

Win

Seritage: A successful real estate play

Many Wall Street analysts and investors have speculated that Mr. Lampert’s primary interest in Sears was its real estate. The retailer had hundreds of stores in prime malls and shopping plazas across the United States. These properties could be sold to more profitable retailers or become something else entirely, like movie theaters, condominiums or offices.

ESL invested $745 million, and Mr. Lampert became Seritage’s chairman. Its share price has soared 45 percent since its initial public offering and prominent investors like Warren E. Buffett have bought into the company. Mr. Lampert’s stake in this business is now worth approximately $1.1 billion.

Unclear

The bankruptcy and what comes next

The bankruptcy will most likely wipe out ESL’s equity stake and could reduce the value of the loans it has made to Sears.

But Mr. Lampert could still end up with what’s left of its other real estate and businesses. On Monday, he said he hoped to buy 400 profitable Sears and Kmart stores. If his bid is the highest, Mr. Lampert could continue to run the stores with no debt and less costly leases or he could sell off some of the best locations.

In August, he offered to buy Kenmore, the Sears appliance brand, for $400 million — the final price could change in bankruptcy. Kenmore, which has a loyal following and last year started to sell air-conditioners, refrigerators and other products on Amazon, could flourish as an independent company.